Wal-Mart Poised to Top Fortune 500 List

Feb. 19, 2002 — -- If it seems like every time you turn around there's a Wal-Mart, it's no coincidence.

With expected 2001 sales of $218 billion, the retail giant is on track to become the nation's largest company in terms of revenue. That would also bring the Bentonville, Ark.-based retailer to the top of this year's Fortune 500 list of the largest U.S. companies, surpassing last year's top-seeded Exxon Mobil, which saw revenues of almost $213 billion in 2001.

General Motors, the only other company to ever top the Fortune 500 list, had revenues of around $177 billion last year. A Fortune spokeswoman would not comment on speculation over which company is expected to top this year's list, which will be unveiled in the magazine's April issue.

Wal-Mart's ascendancy to the top spot would not only break the stranglehold that GM and Exxon Mobil, which previously dominated the list when it was just Exxon, have had since Fortune started publishing the ranking in 1954. It also highlights the growing importance of the service sector to the U.S. economy.

Indeed, as one of the largest retailers in the U.S., Wal-Mart doesn't actually produce anything. But what it does do — guarantee the best price possible price on consumer goods — has made it the epitome of the service industry ethic.

"Wal-Mart is a great microcosm of the U.S. economy," says Steve Paspal, portfolio manager at John Hancock Financial Services. "They provide service and they give it to you at the best possible price. They're willing to transfer their efficiencies onto the consumers, which snowballs demand and creates the rapid sales rise."

One long time company watcher, Gary Hoover, founder of corporate research provider Hoover's Inc., says he's surprised it's taken so long for a service company to make it to the top of the Fortune 500, given the growing importance of the sector to the U.S. economy.

"They are the antithesis of General Motors," he says. "They really are a bunch of guys stocking the shelves to an incredible degree."

In 1954, manufacturing jobs outnumbered service sector positions by a ratio of three to one, according to the Department of Labor. But by 2000, that ratio was turned almost upside down, with the service sector employing around 40 million people compared to around 18 million people in manufacturing positions.

The service sector's growth on the Fortune 500 has been slow but steady. Last year's top 10 included, along with Wal-Mart, telecommunications providers AT&T and Verizon and financial services company Citigroup. In contrast, all of the top 10 companies on the list in 1990 were manufacturing companies.

Hoover expects the service sector to gain even more prominence on the list, unless some of the top 10 manufacturing giants get larger through mergers or acquisitions, Other service firms on last year's top 25 include financial firms J.P. Morgan Chase, Merrill Lynch and Bank of America as well as retailers Home Depot and Kroger.

What has made Wal-Mart such a retail behemoth is its pioneering concept of everyday low prices. Instead of producing weekly flyers showcasing selected sale items, Wal-Mart promises low prices every day. Because it buys such large volumes, the company is able to get lower prices from the suppliers and pass them on to consumers.

This strategy has made it difficult for other discount retailers to compete. Kmart, which recently filed for Chapter 11 bankruptcy, is one retailer feeling the heat.

"Kmart created this culture that you have to have a sale every week in order for people to come in," says Arun Jain, professor and chairman of marketing at the University at Buffalo School of Management. "That means that if you do not have the circular, there is no sale, and no bargain to be had. But Wal-Mart said there is a bargain all of the time. This was a totally different strategy."

What also sets Wal-Mart apart is its use of technology. The company has shared sales data with its suppliers since 1991 and now uses a Web-based product called Retail Link, which allows Wal-Mart and its suppliers to see what products are selling and where. It also helps the retailer keep a low inventory, therefore lowering its operating costs.

"They have such an efficient system so that goods are coming in without sitting in the warehouse," says Jain.

Of course, Wal-Mart's reign has not been without detractors. The growth of big box retailers such as Wal-Mart has sparked grassroots protesters who resent the company taking business away from mom and pop retailers.

Wal-Mart spokesman Tom Williams says the company tries to be a "good neighbor" in communities where it puts down roots, and counters that putting in a Wal-Mart might actually draw traffic to adjoining stores. Economists also note that competition is an inevitable side effect of a capitalist system, and Wal-Mart's dominance will push smaller retailers to find niches in order to survive.

As for the prospect of topping the Fortune 500, Williams says no matter what the company's revenue, finding the best price for the customer will always be Wal-Mart's top priority.

"They're not going to Wal-Mart because of where it happens to be on the Fortune 500 list, but because they expect everyday low prices on the things they want," he says.